Support and resistance (S&R) levels are the most highly discussed attributes of technical analysis.
They are an important part of any trading method .
Basically S&R represent the “battlefield” between buyers & sellers. Buyers provide a support level by increasing the volume of demand and prevent the price from falling lower, while sellers provide a resistance level by increasing the volume of supply and prevent the price from rising. That’s why S&R levels act like a temporary “floor” & “ceiling” of the chart, which means that when ever the price meets one of those levels it is more likely “bounce” off and retrace. However, once the price has crossed the support level it is likely to continue dropping until it meets the next support level & vice versa – when the price breaks a resistance level it will continue to rise till the next resistance level.
S&R basic rules:
1) Support levels, once penetrated, frequently become resistance levels and vice versa .
2) The more often a support/resistance level is “tested” (touched and bounced off by price), the more that specific level is significant.
3) The larger the time scale is, the more important the S&R levels are.
S&R levels can be identified by:
1) trend lines.
2) horizontal lines of price high/low stops.
3) moving averages.
4) pivot points.
5) Fibonacci levels.
6) Psychological levels near round price numbers.
7) volatility is also used to calculate potential support and resistance levels.
The image below shows the usage of trend line (white) , horizontal price stop lines (red) and moving average (navy) as support & resistance lines and the price behavior at those levels.